WEEKLY ECONOMIC ANALYSIS: April 24th, 2009

Provided by TEAM Financial Services

"Wall Street people learn nothing and forget everything." 

- Benjamin Graham 

Items for Discussion

TEAM Financial was apparently not the only organization to take note of the “scoop” from a blog on Monday regarding the stress test results of the largest 19 banks in the US. The New York Times and several other major news services picked up the story, despite the blog being maintained by someone who appears to be a bit unstable and extreme….and we are trying to stoop to the level of the blog writer in our description. Despite the source of the report, TEAM continues to believe that it could be pretty accurate and that most of the major banks in the is country will require additional capital to absorb losses over the next couple of years. 

The Pi cycle, which started off with a bang Monday with a violent financial market reaction, is supposed to pinpoint turning points in the global economic cycle – not necessarily the stock market or major stock market indexes like the S&P 500. For example, the February 2007 turn date in the Pi cycle resulted in a mini-crash in many global stock markets, but that didn’t stop most markets from continuing higher for 5-8 months longer following the mini-crash. The important development from that turn date was the beginning of the implosion of the financial sector and system. 

Will the most recent turn date usher in a similarly important development? One week is far too short a time to try and make any determinations, but our leading candidate of a significantly weaker US dollar got off to a good start this week. The US dollar was weaker against almost all currencies and commodities for the week. Most importantly to TEAM, it was particularly weak versus commodities and those currencies from countries very rich in commodities, like Canada, Australia and New Zealand. 

Market/Economic Climate 

We’ve grown relatively cautious on the short term over the past couple of weeks, and that has been a bit premature. Markets continue to display a significant amount of resilience, but behind the curtain we see growing signs for short term concern. Market leadership is narrowing considerably, which often occurs towards the end of high momentum market moves. For example, markets were very strong on Friday, yet three major sectors sat out the rally and actually finished the day in the red – utilities, consumer staples and healthcare. Interestingly, these three sectors are typically considered more defensive and consistent growers, so their being abandoned for more cyclical sectors like technology is a good indicator of short term aggression on the part of investors. 

Even if the market is not going to correct or experience a significant retracement of the move off the early March low (which remains our base case scenario), then we would still expect some sector rotation to emerge. TEAM currently has a barbell approach in place for clients, with significant exposure to more cyclical areas like energy and commodities, while also carrying a significant exposure to consumer staples and healthcare. 

The market segment that has caused us the most angst in recent weeks has been precious metals. Our assessment of the long term fundamentals has remained extremely bullish and the stocks in the sector remain extremely cheap based on historical parameters. Despite all of these long term positives, the precious metal stocks acted like death over the past few weeks prior to Thursday and Friday this week. Gold and silver rallied well late in the week, but most importantly to TEAM is the rapidly approaching earnings season for the gold and silver producers. We expect the results to be very healthy for these companies and are anxious to see how investors greet the news. A positive reaction could usher in the next leg of the bull market, while a negative reaction could indicate that a more severe correction in the sector is likely.

Humor for the Weekend 

This graphic comes via the Big Picture Blog authored by Barry Ritholtz.

Weekly Economic Analysis newsletters are provided by TEAM Financial, and are written by TEAM's Chief Investment Officer, James L. Dailey. Visit TEAM's website if you want to receive weekly economic updates right in your inbox - Click here.